Trinity Capital: 15% Yield, 9 Straight Dividend Hikes

Does your portfolio include any BDC's? Business development companies offer retail investors high yield exposure to private companies, and some of them, like Trinity Capital (NASDAQ:TRIN), focus on companies which are already backed by venture capital firms. Like certain other BDC's, TRIN benefits from rising interest rates.

The VC market has been constrained over the past five quarters, with total VC deals dropping from $346B in 2021, to $246B in 2022. The Q1 '23 figure was $37B, which is $148B annualized, a further large drop.

Company Profile:

Trinity Capital Inc. is an internally-managed BDC which specializes in venture debt to growth stage companies looking for loans and/or equipment financing. Trinity Capital Inc. was founded in 2019 and is based in Phoenix, Arizona, with additional offices in Lutherville-Timonium, Maryland, San Diego, California, and Austin, Texas.

It IPOd in January 2021, but had a longer prior history dating back to ~2008 in its predecessor funds. Over the past 15 years, Trinity Capital has done $2.4B in fundings, in 287 investments, with 165 exits, and has $1.1B in Assets under management ("AUM").

As of 3/31/23, Secured Loans made up ~74% of TRIN's portfolio, followed by Equipment Financings, at ~22%, and Equity & Warrants, at ~4%.

Rising Interest Rates Are Beneficial for TRIN:

With the advent of rising interest rates, management has increased TRIN's exposure to floating rate loans over the last five quarters, from 59.6% in Q1 '22, to 70% in Q1 '23:

Management estimates that, for every 100 basis point increase in the prime rate adds an additional $5.4M of interest income, or $0.15/share to TRIN's annual earnings.

This has been evident in TRIN's core portfolio yield, which has from 12.9% in Q1 '22, to 14.3% in Q1 '23:

The main difference in TRIN's holdings vs. other BDCs is that it has more exposure to manufacturing, due to its equipment financing investments. Its top five industry exposures comprise ~51%% of its portfolio, with green tech, at 14%, finance/insurance, 11.5%, (up from 10.4% in Q4 '22), food and agri-tech, 9.1%, real estate tech, 8.8%, and life sciences, at 7.3%. 18% of its holdings are less than 4% of the whole:

Portfolio Ratings:

As in other BDCs, TRIN's management evaluates and rates the portfolio companies each quarter. As of 3/31/23, the top two tiers comprised 27.6% of the portfolio, down from 49.3% in Q1 '22. Conversely, the bottom two tiers rose to 3.4% in Q1 '23, vs. 1.4% in Q1 '22.

The overall weighted average was 2.8 in Q1 '23, vs. 3.1 in Q1 '22, due to a big rise in Tier 3 "performing" assets, from 50.3% in Q1 '22, to 69% in Q1 '23:

Earnings:

NAV/share had a slight sequential decline in Q1 '23, dropping from $13.15 in Q4 '22, to $13.07.Total NAV increased by $10M vs. Q4 '22.

Basic NII/share was $.55, more than covering the $.47/share distribution, while net unrealized gains added $.09/share, which was countered by -$.25/share in dilution.

Q1 '23 - TRIN's total investment income jumped 30.4% in the quarter, with NII up 22.4%. Interest expense rose ~$4.2M, up 63%. NII/Diluted share was down -3.7%, due to a 26% increase in the share count vs. Q1 '22.

2022: Trinity Capital's earnings benefited greatly in 2022 from the rise in interest rates, and having a higher percent of its portfolio in floating rates. Interest expense rose over 67% in 2022, but was outpaced by earnings.

Net investment income, NII, rose over 83% in full year 2022, with Total Investment Income rising 77%. Diluted NII/share jumped 47.6%, even with a 20% rise in the share count.

New Business:

Q1 '23 investments funded totaled ~$70.4M, comprised of a $5M investment in one new portfolio company, a $5.2M investment in the JV and ~$60.2M of investments in 11 existing portfolio companies. Investment fundings totaled $35.9M, equipment financings totaled $31.3M and warrant and equity investments totaled $3.2M.

Proceeds received from repayments were $82.8M, which included $42.1M of investments sold to the JV, $27.6M from normal amortization, and $13.1M from early debt repayments. The investment portfolio decreased by $6.4M, 0.6%, on a cost basis.

Dividends:

TRTN's most recent quarterly distribution rose by $.01/share to $.48, its ninth-straight quarterly hike, and management also added a $.05/share supplemental payout.

At its 6/28/23 closing price of $13.66, TRTN's base forward dividend yield is 14.06%. The $.05 adds another 1.46%, for a total yield of 15.52%.

Distribution coverage was 1.08X in Q1 '23 for the regular $.52/share distribution. TRIN also had $1.64/share in Undistributed Net Investment Income, UNII.

Profitability and Leverage:

BDC's calculate Net Income as NII + Realized Gains + Unrealized Gains.

Like other BDC's, TRIN had some negative net income in 2022 due to negative, non-cash Unrealized Gains. This improved in Q1 '23, and increased ROA and ROE back into positive territory, although both figures were below BDC averages. debt/NAV was slightly better, while EBIT margin was stable.

Using net investment income, NII, TRIN's Q1 '23 trailing ROA was 6.7%, and its ROE was 16%.

The assets/debt ratio was stable, at 1.85X in Q1 '23, whereas EBIT/interest coverage was a bit lower, at 3X:

Debt and Liquidity:

TRIN has no debt maturities until January 2025, when $182.5M in unsecured notes come due. Its $400M Credit facility matures in October 2026, giving management plenty of time to refinance. TRIN has a BBB investment rating from Egan-Jones.

As of 3/31/23, it had $$174.8M in available liquidity, including $8.3 in cash, and $166.5M in available credit on its KeyBank Credit Facility.

Performance:

TRIN has outperformed the BDC industry, the broad financial sector, and the S&P 500 by wide margins so far in 2023, and over the past month.

Analyst Targets:

With its price surge, TRIN's share price has outrun analysts' price targets, which tend to lag. At $13.66, it was 5.65% above street analysts' average price target of $12.03, and ~9% below the $15.00 highest price target.

Insiders:

Insiders bought ~7400 shares in May and June '23, at prices ranging from $11.56 to $13.25. They previously bought ~3900 shares in March '23, but their biggest buys were in December '22, when they bought ~50,000 shares in the mid-$10 range.

Valuations:

At its $13.66 6/28/23 closing price, TRIN had a 4.5% premium to its 3/31/23 NAV of $13.07/share. That's higher than the BDC industry average -7% price to NAV.

However, TRIN was selling at a cheaper earnings multiple, Price/NII, of 6.44X, vs. the 8.23X industry average. Its forward P/E of 6.35X is also lower than average, while its 14% regular dividend yield is higher than average for its industry.

Parting Thoughts:

TRIN is a good candidate for an income investor's watchlist - it's currently overbought, but, given the potential for market headwinds, you may be able to snag it at a cheaper entry price this summer, or in the typical September market swoon.

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